Your credit score is one of the biggest factors that lenders use to determine what type of loan you qualify for. If you are one of the very few people out there with exceptional credit, you can skip this post! But if your credit would benefit from a boost, here are a few tips to help.

Boost Your Credit Score by Paying Bills on Time

The first and most impactful thing you can do to increase your credit score is to make sure you pay all of your bills on time.

Your score’s entire existence is to help lenders understand how good you are at paying bills on time. A high score means you’re pretty much always on time and paying the full amount. A low score is the opposite – it means you keep missing payments on a regular basis, or you aren’t paying the full amount required.

That’s why the best place to start is here. When a bill comes in, do whatever it takes to get it paid. Cut back on other things like eating at restaurants, drive a bit less to save on gas, find ways to save at the grocery store, etc.

Lower Your Debt-to-Income (DTI) Ratio

Another factor that comes into play is your debt-to-income ratio. This divides your monthly payments from debt over your gross income.

For example, let’s say you have four types of debt right now:

In this case, your total debt payments each money come out to $2,000.

Now let’s say you make $61,000 per year, which is the median income in the U.S. right now. That means you make about $5,100 per month.

To get your DTI, divide $2,000/$5,100 = 39%. That’s a little higher than lenders prefer to see. In general you want to shoot for a DTI of less than 36%.

How do you get there? There are two main ways:

The best solution is to do a bit of both. For example, let’s say you were able to pay off your student loans and make an extra $200 per month.

Now your equation becomes $1,800/$5,300 = 34% – a nice improvement, putting you in a good place in a lender’s eyes.

Improve Your Credit Score by Improving Credit Utilization

Let’s compare two hypothetical scenarios.

Bill has a maximum credit limit of $10,000. His credit card bill is typically around $8,943.

Sue has a maximum credit limit of $10,000, but her bill is typically under $2,000.

Who do you think is a higher risk for a lender? Of course it’s Bill. He’s using most of the credit available to him, which is a red flag for lenders. His credit utilization ratio is too high.

To lower your credit utilization and boost your score, pay off some of that revolving debt.

Conclusion

Need more tips to boost your credit score? Or maybe you have questions about the lending process in general? No problem! Send us an email at john@plghomeloans.com and we’ll be happy to help.

 

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